Posted by: Josh Lehner | November 20, 2019

Oregon Economic and Revenue Forecast, December 2019

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The longest running U.S. economic expansion marches on. Growth has slowed in 2019 and downside risks remain elevated. However, a recession is not yet seen in the data. Importantly, the two primary causes for concern are either improving – the yield curve is no longer inverted – or at least not getting worse – the trade war escalation is on hold for the time being. That said, while slower growth this year was expected, the question is whether or not the composition of and factors behind the slowdown point to something more worrisome.

Nationwide economic growth has slowed to potential as business investment remains weak, but the consumer is strong. Of course consumption is not a leading indicator, but provided the labor market holds up, so too should spending. Here in Oregon, job growth has slowed to gains seen in our underlying population. For the eleventh year of expansion, such gains remain solid. To date, Oregon’s slowdown is driven more by fewer hirings and a tight labor market, rather than an increase in layoffs. These dynamics, when combined with ongoing strong income growth keep the outlook intact. As confirmed by recently released Census data, current economic conditions in Oregon have rarely been better. The expansion endures even as risks remain elevated.

Oregon’s General Fund tax collections continue to outstrip gains in the underlying economy so far in the 2019-21 biennium. The largest part of Oregon’s General Fund, personal income tax collections, surged during the peak tax season and continued to post strong gains as extension filers submitted their tax returns in the fall. Both income tax payments net of refunds, as well as withholdings out of paychecks, have been posting growth rates above what economic gains would call for.  Corporate tax collections have slowed a bit in recent months, but remain elevated above their typical size as well.

The primary forecasting challenge for the current biennium is to determine how much of the recently strong tax collections are due to temporary factors that will fade away in the months ahead.  Even without the onset of recession, revenue growth is facing major headwinds during the current biennium. State & federal tax policies, a big kicker refund and slower economic growth will all weigh on General Fund revenues in the near term.

While there is a great deal of uncertainty about the staying power of recent revenue growth, the December forecast reflects a stable economic outlook, with the expected size of General Fund collections increasing slightly over what was expected at the Close of Session.

Going forward, the uncertain path of the nationwide economy will dominate the revenue outlook.  Fortunately, Oregon is better positioned than ever before to weather a revenue downturn.  Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion. When the projected ending balance for the current biennium is included, Oregon is expected to end the biennium with more than $2.7 billion in reserves set aside, amounting to almost 13% of the two-year budget.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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Posted by: Josh Lehner | November 14, 2019

In The News: Food Manufacturing Closures

Today we learned that the NORPAC sale to Oregon Potato Company fell through and that NORPAC would be shutting down both its Brooks and Salem facilities, in addition to the previously announced closure of their Stayton facility. All told 1,400 jobs are being lost, which any way you slice it is a big number. If we look at food manufacturing in the Salem MSA, on an annual basis employment totals about 4,500 jobs. Now, there are still big seasonal swings where the industry goes from around 6,000 during peak season to more like 4,000 during the rest of the year. But when such large losses are concentrated in a specific industry and in one regional economy, the concerns mount.

Losing a job and having to find another one usually results in lower wages, at least initially, as part of worker pay is not just overall experience, but within firm experience (length of tenure). On the brighter side, it is relatively easier to find a job today when the labor market is tighter than it is during a recession when there is more competition for fewer job openings. But layoffs, closures, and transitions are never easy. The Salem economy is about to have another 1,000 job seekers with similar skill sets searching for employment during the holidays.

Now, we had some inkling that there was trouble within the food industry even if we could not pinpoint what was going on. Starting about a year ago, we saw declines in weekly hours worked. We have imperfect data, but what we could tell were the drops were seen in food manufacturing and were outside of the Portland region. These declines did not appear to be trade war related, as the timing does not line up neatly nor were there declines in durable manufacturing hours worked at the time either. Now, we have seen durable hours worked decline in 2019, and we think some of that is trade war related. But back to food.

The hard thing to know was whether these hours worked declines meant there were underlying issues, or if it was volatility in the data. At the time, and even so far in 2019, the food manufacturing industry overall was adding jobs. We flagged the hours worked issues with our advisors a few times, but kept our outlook intact given employment was growing. Clearly there was something else afoot and we are adjusting our forecast accordingly ahead of next week’s forecast release.

As we discussed last year, Oregon’s food economy has been doing quite well over the past 10-20 years. The cluster is growing quickly, and outpacing growth in most other states as well. In particular, the employment gains in food processing had been robust. During a time period (2005-2018) when Oregon lost nearly 10,000 manufacturing jobs on net, the gain of 12,000 jobs among food and beverage manufacturers was a key reason why the state didn’t see larger losses.

The largest drivers of these gains have been breweries and fruits and vegetables. However the growth has been across all sub-sectors and regions of the state. The processing segment of the food economy in Oregon had grown to around 2% of all such jobs nationwide, and it’s local industry concentration was 50% larger than it was nationwide (location quotient of 1.5). And while wages aren’t high, the pay does tend to be better in processing — the value-added part — than it is in the distribution or service segments of the food economy.

As always in these types of situations, the question is whether or not the closure is a firm specific issue, an industry specific problem, or a harbinger of macroeconomy problems. I won’t pretend I have the answer right now. And even though I am not aware of similar announcements elsewhere in the industry, only time will tell.

Finally, the food industry has a fairly large presence throughout the Pacific Northwest. Expectations today are that local crops will be sent to other facilities, maybe (probably?) those in the region for processing and packaging. This will require reworking the local supply chain to get goods to market. These transitions are also not costless and not always easy, however local farmers should be able to find buyers for their commodities.

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Posted by: Josh Lehner | November 14, 2019

Housing Remains a Macro Issue

Just a quick reminder that housing supply remains a macroeconomic issue:

  • Residential investment has been a drag on GDP growth in 8 out of the last 10 quarters.
  • Low levels of new construction contribute to rising prices and worsening affordability if incomes don’t keep up.
  • For places like the Pacific Northwest that rely on in-migration to drive long-run economic growth, if young, working-age households cannot afford to move here in the first place, forecasts for private sector revenues and public tax collections need to be lowered.
  • While local policies clearly have impacts, new construction relative to population growth remains quite tame across the country.

Our office has harped on this topic quite a bit over the years but it’s really this last point that is missing at times from the conversation. It is true that national statistics can mask regional differences and we also tend to attribute local statistics to local conditions. However, if we step back and look at new construction, it really has been low everywhere. Or at least low relative to population growth, despite considerable variation in economic conditions and local policies.

This was once again front and center over the holiday weekend as the Los Angeles Times had an article on Boise’s growth, California migrants, and housing affordability. Sound familiar? Do read the piece if you want a bit of navel-gazing. But I think it is important to highlight that Idaho and Boise are experiencing low levels of new construction just like the rest of the Pacific Northwest. Their trends in terms of construction, prices, vacancy rates and the like has really driven home the point to me that housing supply truly is a macro issue.

A more timely look at new construction relative to population gains shows no real encouraging signs of life either.

It’s been a few years, but our office previously dug into some of the commonly cited reasons for the low levels of new construction. I don’t believe that list has really changed. It’s more nuanced than this, but if we trace the logic of industry trends this cycle it goes something like the following. Affordability is worse today because we didn’t build enough units. We didn’t build enough units because there aren’t enough buildable lots. There aren’t enough buildable lots because we haven’t done enough land development to turn raw dirt into buildable lots. We haven’t done enough land development in part because financing remains tighter for these types of loans.

If housing supply is a macro issue (it is) then it makes sense to look for macro policies or levers as key players. Our office’s earlier work, and relying of work from the National Association of Home Builders, shows that the stock of loans for single family builders for acquisition, development, and construction remains quite small. It takes time to turn raw dirt into lots and these are risky loans, their collateral is typically the dirt itself. But this, at least to me, seems to be a key sticking point for housing production.

Notes: This chart is nominal, so in real terms these loans are even smaller. That said this is the stock of these loans and not the flows, which could mask a healthy amount of churn and project financing. Builders turn to other sources of financing if traditional lending is unavailable, so this chart is an undercount of all of this type of activity, but still highlights in important issue.

While housing supply is an macro issue, it does not mean that nothing can be done locally. This past legislative session, Oregon passed 3 main housing-related laws. I have spoken to a few groups about the new policies in recent months and at a very high level they look something like the following.

SB 608 – rent stabilization – is designed to prevent the worst displacement scenarios while also not discouraging new housing supply. HB 2001 – re-legalizing missing middle housing — is designed to encourage or at least allow more housing units on land already inside urban growth boundaries. HB 2003 – regional housing needs analysis — is designed to ensure that housing supply meets the true, regional needs and not focus purely at the city level where we can lose the forest for the trees at times.

Bottom Line: Housing supply is a macroeconomic issue. New construction remains subdued across the country and not just due to local policies, although they certainly matter too. It will take years before we know if new legislation bears fruit, but hopefully over the long run supply will increase relative to the previous status quo. In the big picture, higher levels of new construction would support stronger economic growth today, and better affordability for current residents. In places like the Pacific Northwest, higher levels of new construction would also ensure stronger growth in the future as well.

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Posted by: Josh Lehner | November 7, 2019

Openings, Layoffs, and Net Job Gains

When economists talk about growth, we almost always are referring to net growth. There is considerable amounts of churn in the economy every single day. Roughly, 12% of jobs are either being gained or lost at any given point. What we’re concerned about is whether the good news outweighs the bad news, or vice versus. Even though we focus less on the gross flows, they still can provide insights and highlight important trends. This could be especially important at a point in time like today when job growth has slowed considerably over the past couple of years.

Let’s first look at job availability in Oregon. The number of open positions that firms are looking to fill tells us something about how companies view their current workforce needs and also how they view the future. Here we have have three different measures that are, unfortunately, telling us three somewhat different stories.

That said, in the big picture it’s clear that firms are holding steady their number of available jobs at best, but more likely pulling back on their number of openings, or at least advertised openings. Our office uses the help wanted online ads as part of our leading indicator model and the declines in recent years does weigh on that index of future growth.

Now, the question is are firms actually looking to hire fewer new workers or are they simply advertising their openings less? That unknown answer matters quite a bit on how to interpret the data for the outlook. If firms are hiring less because their sales are slow or expected to be slow in the future then it would signal trouble. However if they are advertising their openings less because they know its a tight labor market and its hard to fill positions, then the implication is more benign and less malignant. While we can discount the state JOLTS data — it’s largely a sharedown from national and regional data — the national JOLTS data does point more toward the latter than the former. Job openings are weakening, yes, but only after years of very significant gains, and national hiring patterns are holding up better as well.

Now, what about the other side of the ledger? Are firms laying workers off at a higher rate or just hiring them at a slower pace? We lack timely data here, but one indicator is looking at Worker Adjustment and Retraining Notifications (WARN) where firms let public agencies know they are downsizing or laying folks off. This is publicly available information and lately the numbers are elevated.

That said, this is clearly an imperfect measure. WARN notices in recent months are on par with readings we’ve seen a few times so far this expansion, or at times when job growth remained quite strong and the unemployment rate was dropping. WARN notices also do not add up to much in the grand scheme of things. Even during the Great Recession, WARN notices only totaled around 11,000 jobs or so, even though the state overall lost nearly 150,000. They are one indicator, certainly, but at the same time they do not appear to be a leading indicator of where we are headed.

One measure that is a good leading indicator for the economy is the number of initial claims for unemployment insurance. These figures capture two effects. The biggest one being they are a measure of layoffs in the economy. Around 96% of all jobs are covered by unemployment insurance, so folks who file claims are representative of the overall labor market. This also includes people impacted by firm decisions that may not meet the technical thresholds required to file a WARN notice like those seen above.

The second, smaller effect captured by UI claims is worker behavior. If an individual is able to quickly land another job, they may not take the time and effort to fill out the paperwork, file a claim, and wait for their payments. On the other hand, if an individual believes it will be harder to find another job quickly, or maybe they search for a week or two and then file a claim, we could see these figures rise not just because layoffs are higher, but because hirings are weaker.

The good news overall is that initial claims for unemployment insurance remain near historic lows. Despite the largest economy, workforce, and population in Oregon’s history, initial claims are basically lower than ever. This should bode well for future growth in the months ahead.

The one potential issue here is that claims are somewhat elevated in 2019 relative to 2018, at least in Oregon. Prior to each of the past two recessions, these initial claims jump up and run about 10-15% higher on a year-over-year basis. This increase occurs about 8-12 months prior to the official start date of the recession. Today, claims are running more like 5% higher on a year-over-year basis. Clearly we’re not at a similar threshold as the past two cycles, but any increase is certainly worth monitoring in the weeks ahead. A complicating factor here is a handful of the announced layoffs will be hitting the time of year when seasonal work ends and UI claims increase anyway. We know WARN notices in and of themselves do not tend to move the needle in the big picture, but may make it harder to interpret the data in the weeks ahead.

Bottom Line: Job growth in Oregon is slower today than in recent years. Most signs point more toward an economy that is closer to full employment and it being harder for businesses to find the labor, even though they want to grow. However there are a few potential worrisome signs. The number of job postings is flat at best and initial claims are just a hair above their year-ago readings. Should these patterns continue or of course worsen, then we should be more concerned. However, today there are not many red flags that a recession is imminent *knocks on wood*. The broad array of leading indicators are not plunging.

Furthermore, while initial claims is one of the top two or three indicators available, it is unclear whether a small increase is a warning sign or just part of the noise. If we look back two charts and examine the 1990s, there was nearly a decade’s worth of ebbs and flows around a very low number of claims during a long economic expansion. Only when claims spiked significantly in 2000 was it a clear warning sign. Bringing more comfort and possibly clarity, the rise in initial claims is not seen in the U.S. data. In fact 2019 is running just a hair lower than 2018. The expansion remains intact, at least for now.

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Posted by: Josh Lehner | October 30, 2019

Big Question #2: Capital and Long-Run Growth

One forecasting challenge is we do not know what the 11th or 12th year of an economic expansion looks like. We’ve never been here before. Our baseline forecast calls for ongoing, but slowing growth as we run into supply side constraints. However, that is more theory than data. I’ve been wrestling with two big questions in recent months that I’m putting to our advisors in the coming weeks. Last week we covered a short-run growth question, while this week I will lay out the long-run growth question.

Over the long-run, after we get away from near-term cyclical dynamics, there are two primary sources of growth: labor and capital. This means long-run economic growth is really about how many workers there are and how productive each worker is. Our office has written extensively on population growth and demographics over the years because it is Oregon’s comparative advantage and is a key driver of growth.

Our office has certainly discussed capital and productivity, however we have spent less time doing so because we lack good local data. This summer the Bureau of Labor Statistics published some experimental state productivity statistics (H/T OED’s Nick Beleiciks). No surprise, but Oregon ranks well. From 2007 to 2017, Oregon’s labor productivity increased the 2nd fastest among all states. Our unit labor cost growth ranked 3rd lowest, meaning the regional economy was able to produce a lot more stuff without price pressures forming. Now, the flipside of that is our real hourly compensation increase was right in the middle of all states, ranking 25th best. Now, we know our wages have increased significantly faster in recent years, so this is something to keep an eye on.

In the big picture, there are different types of capital that can raise worker productivity and drive long-run economic growth. These types of capital are not mutually exclusive and one type is not necessarily better than another.Financial capital is essential for firms to grow and expand and overall Oregon does OK here. Oregon is not a financial center nor do we have a deep bench of venture capital or the like. The state largely relies upon investments and loans made by out-of-state financial institutions. Encouragingly, the latest Oregon Capital Scan report shows we are seeing some improvements.

Physical capital is probably what most of us think of when it comes to worker productivity. It’s about plants and equipment and being able to make more widgets per worker. However it is also about office space and software and worker productivity in the knowledge economy.

Natural capital is largely about putting natural resources to use. Obviously here in Oregon we have an abundance of natural capital. The questions are how best should we use them and to what degree should we use them?

Finally, I tend to think of human and social capital together, although there are important differences. Social capital is more about community networks and involvement and is something we’ve touched on briefly when it comes to economic mobility. Human capital is largely about the skills of the workforce.

Now, it is important to point out that education, at least in the form of a 4 year degree or higher, is not the be-all and end-all of a good paying job. Nor is it the only measure of skill. See our report on job polarization and our dive into occupations, wages, and education for a more thorough discussion. That said, we know that in the coming decade a college degree is required to be a competitive job candidate for around 80% of high-wage jobs. It is increasingly the ruler many are measured against.

So how’s Oregon doing? Statewide we’re doing alright. This is in part because migrants have higher levels of educational attainment, but also in part because attainment is rising among those born in Oregon as well. But if we look beneath the statewide figures we see a lot more variation.

The share of the working-age population in Corvallis with a college degree is among the absolute highest in the nation. Portland’s is getting up there and the increases in the past decade are part of the transformative growth experienced this cycle. Bend is now better than three-fourths of all U.S. metros. And both the North Coast and Gorge have some of the highest levels of educational attainment in rural areas across the entire country.

However, one of the clear trends that has emerged in recent years is that educational attainment is not rising everywhere. The share of the working-age population with a college degree has remained pretty steady over the past two decades throughout much of the Willamette Valley. This is true in the Rogue Valley as well. Click here for more on college graduates in Oregon metros and their ranking.

Now, I am not here to try and pick on anyone. While most of the Willamette and Rogue Valleys do not have an above average, nor increasing share of college graduates, they do have larger shares of the workforce with Associate’s degrees or with some college coursework. We know that every year of schooling helps when it comes to employment opportunities and wages. As such some of these potential concerns may be overblown.

That said, I have been trying to think through the implications of these trends on future economic growth. At this point I do not believe these trends are a barrier to growth, but I do believe they warrant being an issue to watch. This is for a few reasons.

First, all regions of the state are seeing good economic growth this cycle when it comes to jobs, wages, household incomes and the like. It does not appear to be holding back growth so far. Second, there are many other types of capital. Not all local economies will hit it out of the park along all dimensions. So to the extent a local economy lacks in one type of capital, it can make up for it with higher productivity and stronger economic growth by using the other types.

However the reason it is an issue to watch is precisely because it is one type of capital that is not showing gains in some parts of the state. As such, it is like removing one avenue of future economic growth. By no means is it a deathblow but it does mean some local economies are more reliant upon the other avenues of growth. To the extent those falter, then there are fewer overall opportunities. The real concern is if it at some point in the future it does put a lid on potential growth. It could make further progress even more challenging once we get beyond the short-term cyclical dynamics.

Of course this is not an Oregon specific issue. These trends and patterns are seen throughout the nation. In a research note just the other day titled “The rich get richer,” Moody’s Analytics wrote the following:

As more educated workers congregate in places that already boast significant advantages, divergence across regional economies will likely intensify. Variation in median household income across economies has grown more pronounced over the past few decades, as high-wage jobs cluster in selected metro areas with large, skilled workforces. With prime tech jobs bypassing much of the nation, more creative approaches may be needed to try to ensure that left-behind regions can attract young, educated workers.

And brand new research out of the Federal Reserve Bank of Richmond documents the growth of college graduates in a handful of larger metropolitan areas.

Update: In conversations a question I keep getting is “why?” Well, I don’t have a perfect answer here. However some of it is a form of economic sorting based on the types of jobs and also on housing costs. We discussed this at greater length when looking at the Urban Wage Premium research previously and the Richmond Fed work linked above does as well.

But at a basic level, the clustering of knowledge-based, high-wage jobs in select urban areas attracts certain types of residents and workers (i.e. young-ish college grads) . This also occurs within regions, where growth and patterns within the urban core differ from the suburbs. It also means, given there no longer is an urban wage premium for those without a college degree, they increasingly do not live in the urban core or even in the handful of large metro areas.

Now, to date there does not appear to be net out-migration from a place like Portland. However I view it more as a choice on the front end. College graduates are disproportionately choosing to move to Bend, Corvallis and Portland. While those without college degrees are moving more to, say, Eugene, Medford, and Salem.

Lastly, it is important to note that all regions of Oregon are growing, and most have favorable demographics. It’s this one type of capital – human capital – that we are seeing some diverging patterns in recent years.

Bottom Line: Over the long-run, economic growth is driven by the number of workers and how productive they are. Oregon’s comparative advantage remains our ability to attract and retain working-age households. To date, productivity in Oregon has been relatively good as well. Looking ahead there are a number of ways a regional economy can grow and raise its productivity. This includes the uses of financial, physical, natural and human capital. Not all regional economies will excel along all dimensions. However if a region lacks one or more types of capital, then it becomes more reliant upon the other avenues of growth. This is not a problem in and of itself, but these issues warrant monitoring moving forward.

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Posted by: Josh Lehner | October 24, 2019

Big Question #1: Oregon’s Slowing Growth

One forecasting challenge is we do not know what the 11th or 12th year of an economic expansion looks like. We’ve never been here before. Our baseline forecast calls for ongoing, but slowing growth as we run into supply side constraints. However, that is more theory than data. I’ve been wrestling with two big questions in recent months that I’m putting to our advisors in the coming weeks. The first is more of a short-run growth question, while next week I will lay out the long-run growth question.

One trend so far in 2019 has been considerably slower job growth. Our office’s forecast has called for job gains to slow a bit but remain above trend through mid-2020 before cyclical growth slows and the demographic drag weighs to a larger degree. However, so far this year job gains are significantly below expectations. This slowdown appears to be legitimate as it is evident in both the household and payroll surveys. Plus the less timely, but near universal count QCEW confirms it as well, at least through June.

Now it needs to be pointed out that this is not necessarily a problem. Growth can slow for bad reasons of course, and we could even fall into recession. However, if growth is slowing due to full employment and demographics, then it is less of a concern. Given ongoing strong wage growth, low levels of layoffs and the like, it is clear the sky is not currently falling. But the slower growth is a bit of a puzzle that we continue to dig into and will be discussing with our advisors.

The slower job growth is seen across the state, in both urban and rural Oregon. Only about 5 counties are adding more jobs per month in 2019 than they did in 2018, while the vast majority are experiencing slower growth or even losses.

That said, the slowdown isn’t impacting all industries equally. Most are growing a little bit slower than last year, but it really is a handful of larger sectors seeing big downshifts in growth that’s driving the overall trends.

Warning: In the following chart I have smoothed the data, removed outliers and adjusted for industry reclassifications. I usually don’t do this and don’t take doing so lightly. However we are trying to identify where the underlying slowdown is occurring. I think this provides a better, or at least a clearer look at the issue.

Let’s look at these sectors a little bit more.

  • Health Care is really the only sector adding jobs faster in 2019 than in 2018. This increase looks to be across all sub-sectors, including ambulatory care, hospitals, nursing facilities, and social assistance.
  • Retail has gone from bad to worse. This isn’t necessarily a surprise, even if our forecast expected stabilization.
  • Durable Goods Manufacturing slowing is across the board in terms of wood products, tech, transportation equipment, metals, and machinery. This would be the first place to look for the impact of the trade war.
  • Transportation and Warehousing slowdown is mostly about a strong 2018 when large, e-commerce distribution centers opened up. 2019 gains are relatively strong, just not as strong as last year. Another big distribution center is currently ramping up but does not appear to be hitting the employment numbers just yet.
  • Construction’s slowdown has been expected in our forecast for some time. While construction activity remains strong, job gains have appeared to outpace measures of activity. As such we expected job gains to slow, although it has not happened in recent years. It is somewhat of a question whether the slowdown in 2019 is as expected (confirmation bias!) or due to something broader impacting the industry.

Now, there are two other sectors showing significant slowing that are harder to understand at the moment. I don’t have any sector-specific stories to fall back on here.

  • Professional and Business Services. This slowdown is across all three main sub-sectors in terms of professional and technical services, management of companies, and admin and waste services. It’s not just temp workers or something like that.
  • Leisure and Hospitality is entirely about food service grinding to a halt. The hospitality and entertainment parts show ongoing gains, as do limited-service restaurants. The drops are in full-service restaurants and bars. The number of restaurants continues to increase, while the number of bars is flattening out. Wage growth remains solid.

Now for the hard part. Why are we seeing the slowdown in Oregon employment growth? I’m going to hold off on giving my thoughts on this until after our advisory meetings. However I see at least three main channels in which a slowdown could materialize.

First would be lower business demand. If firms realize slower sales growth or costs rising faster than revenues, they may pull back on hiring. This could be due to weak consumer spending, a drop if foreign sales tied to the trade war, or policies that raise the cost of doing business. Second would be firms putting off hiring today because they are unsure of future sales, even as current conditions remain favorable. Third would be the lack of available workers. The economy really may be at full employment, or migration may be slowing more than expected, or retirements may be increasing faster than expected. All of those would result in fewer available workers to hire even if businesses wanted to fill openings.

A couple final thoughts. The sky is not currently falling. The unemployment rate remains near historic lows. The best labor market leading indicator is initial claims for unemployment insurance and those remain very low. At this point, the slowdown in job gains is more of a puzzle to be solved than a concern to fret over. We will be diving into this again after our forecast advisory meetings and certainly in our upcoming forecast which will be released November 20th.

As always, let me know your thoughts and stay tuned for the big question on long-run growth next week.

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Posted by: Josh Lehner | October 18, 2019

Maybe Fun Friday: Mid-Valley Commuters

This week I was part of a great real estate event here in Salem. I’ll write up much more on the Mid-Valley outlook in the next week or two. However, as I was putting it all together, something in the latest Census data really stood out to me. The number of Salem area residents who commute to work outside of Salem really jumped last year. Now, this isn’t a surprise to anyone who has been paying attention to the real world. Local growth has been strong and I-5 has been a parking lot during rush hour for some time. But the Census data really hadn’t been showing any increases until now. It was hard to reconcile anecdotal evidence and stories with the hard data. Well now they’re both signing the same tune. Commuting is up and at least 70% of these workers are heading north to Portland for work.

Last summer our office really dug into the data, looking at migration patterns in the Willamette Valley, incomes, homeownership rates and the like. What it showed was there had been a reversal in long-term migration patterns and at least in 2015 and 2016, the net flows were from Portland to Salem. However the 2017 data released last fall was a reversal of the reversal, or a big return to historical patterns of net flows from Salem to Portland. As someone who follows the data, I was a bit stumped on the issue.

However, the latest 2018 data now is an indication that the Northern Flank didn’t hold. There is likely net flows from Portland to Salem again. We’ll have to wait another month or so for the microdata to be released, where we can update our more detailed look to know for sure. But I suspect at least some of this is housing-related. At the real estate event, Portland State’s Gerry Mildner noted that there is about a $100,000 price differential in home prices between the Portland and Salem markets. In our office’s previous look, the Portland migrants to Salem who bought homes basically split the different. They bought homes that were about $50,000 more expensive than what local buyers bought, but those prices were about $50,000 less expensive than what home buyers in Portland paid.

Given we know the vast majority of people move for housing- and/or job-related reasons, this all makes sense. But to the extent that commuting is up, it looks like the moves may be for housing opportunities, while also keeping their existing jobs.

Now, commuting is much more prevalent throughout the Mid-Valley as seen in the chart below. 1 out of every 3 Linn County residents with a job works outside of the county. 40% or so head toward Corvallis, while a third head both north (Salem) and another 16% south (Eugene). 1 out of every 5 local residents in both Corvallis and Salem commute elsewhere for work. Part of these patterns is certainly the close proximity of the areas to each other and the fact that they are all defined as separate metro areas. The three main cities are all within 45 minutes of each other, making commute times long but not insurmountable.

Note on the chart that very few Portland area residents with a job commute outside of Portland. It looks like if you don’t have to live there for work, you don’t. UPDATE: It’s always important to talk about levels and rates. I didn’t at first. My apologies. This very small percentage for Portland (2.8%) does equal a lot of people given Portland’s size. It means more than 35,000 folks leaving the region for work. That’s about the same number as Salem commuters, and also about equal to the number of Albany and Corvallis commuters combined. Also note the relative share of commuters in Grants Pass MSA and Medford MSA. As expected, the percentages are larger from Josephine to Jackson than vice versus even if the absolute number of commuters is similar.

Bottom Line: Commuting is up across the Mid-Valley. Salem area residents are working outside the region to a larger degree than they have before. Some of this is housing-related as the cost differentials drive some migration trends. As such, the housing supply and affordability problems appear to be spilling over into neighboring regions. If true, this marks the first time this is really showing up in the Oregon data, even as the anecdotal evidence has been building in recent years.

Stay tuned for more on the outlook in the coming weeks and a deep dive into the microdata in a month or so.

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Posted by: Josh Lehner | October 10, 2019

Is Household Formation Strong or Weak?

Overall the number of households in the state continues to increase. This is no surprise given that we are a magnet state. In good times and bad people pack up and move to this part of the world, especially when job opportunities are plentiful. Given migration flows in recent years have been about as large as we have seen in absolute terms (not true in percentage terms), it makes sense that the number of new households are increasing quickly as well.

The latest Census data shows Oregon added just over 36,000 new households last year, the highest we have seen in the ACS data. These increases are now catching up to the household formation rates seen in the more timely, but more volatile household survey (CPS). The growing gap between the two different data sets was an issue to watch, however that gap is closing some and does not represent a true problem.

A few things. One, people follow the jobs and as employment growth slows, so too will migration. This is already happening and the most recent CPS data shows household formation across the state is slowing some as a result. Two, while Census pegs the number of new households at 36,000 last year, we know we built just under 20,000 new housing units. This continues to place upward pressure on housing costs overall. Three, see our previous post on the housing starts outlook for more on the better balance our office expects in the coming few years.

While the total number of new households in recent years has been about as big as we have seen, it doesn’t necessarily mean that household formation is strong. In fact, if we dig into the types of households and who is forming them, we see that within the existing population, household formation is actually pretty weak.

Specifically, the headship rate among 20- and 30-somethings continues to drop. Young adults are living at home longer, or living with roommates to a larger degree than a decade ago, let alone two decades ago. Within the Portland region this decline means there are nearly 28,000 fewer households today among the 25-44 year age group than there would be if household formation rates were the same as back in the mid-2000s. Across all age groups, the decline in household formation rates in the Portland region results in 36,000 fewer households on net. This is equal to 3 years of new construction, which is a massive number.

Now, this issue isn’t new nor is it specific to Portland or any other particular region. Len Kiefer, deputy chief economist at Freddie Mac — a great follow on Twitter BTW — put together a report last year on the factors behind this decline in household formation. In short, it’s a number of things like higher housing costs and worse economic outcomes for Millennials who graduated into the Great Recession. However other shifts like the delay in marriage and having kids also play a role as well. And not all factors result in lower rates. For example, higher levels of educational attainment actually point toward more households than would otherwise be expected, as such individuals have higher employment rates and incomes and the like.

Bottom Line: The number of households in Oregon continues to increase. These gains are entirely driven by population growth and the age structure. Within age groups, household formation rates are quite weak for a variety of reasons, including housing costs and economic outcomes. Now, given the strong multifamily construction in recent years, and concerns about overbuilding, these lower rates of household formation among 20- and 30-somethings may actually represent a form of latent demand. As affordability improves via both slower rent increases and rising incomes, a revival of or even just a moderation in the decline in household formation rates could help with both near-term and longer-term absorption of the new apartments. To the extent this occurs, the market may find a new equilibrium sooner rather than later. And it would put upward pressure on the need for higher levels of construction activity to meet the demands of the growing population.

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Posted by: Josh Lehner | October 2, 2019

Update on Oregon Housing Starts

New construction activity in Oregon has grown in fits and starts in recent years. The absolute level of construction is up and our office expects growth of 10-15% in the coming years. However, while the total number of units being built is higher, we know that relative to population growth, this increase is pretty minimal. Oregon is building fewer units per new resident than we typically do. This is true across all regions of the state.

Now, that 10-15% of growth in the forecast can seem like a lot or a little depending upon where you live or what type of housing we’re talking about. What’s been both encouraging, and less-than-encouraging, is what’s happening beneath the surface of these topline figures.

Let’s start by looking at multifamily construction in Oregon. This is the source of much of the volatility in recent years as multifamily can be lumpy. One month you get a big apartment complex permitted and another one may not be coming into the pipeline for another couple of months. Also note that the chart above is quarterly, while the charts below are annual and thus less noisy.

Now, multifamily construction predominantly occurs in large, urban areas. As such, Portland accounts for the vast majority of this type of construction in the state. The Portland data has been quite noisy in recent years, impacting the statewide totals at the same time. Even with the concerns of overbuilding, permit activity remains strong. In talking with our advisors, a lot of this reflects at least a couple of things. On one hand, permits today reflect the fact that the pipeline and pre-development stages filled up years ago. These projects are just now beginning to build. Additionally, finding the perfect balance between supply and demand is difficult. When a multifamily boom occurs, the market tends to result in overbuilding for a period of time. It then takes a few years to work off this inventory, but given migration flows to Oregon, these units will fill up in the years ahead.

What’s also important to note is that while permitting within the Portland area is strong, but largely flat in recent years, this is not true elsewhere in the state. Construction activity is picking up outside of Portland. 2018 was the strongest multifamily year since the early-2000s. Gains in Benton, Jackson, and Lane drive the overall increases and so far in 2019, multifamily permitting remains strong.

Turning to single family construction across the state shows a somewhat different pattern. Single family construction in the Portland area has held steady for pretty much the past 7 years or so. However, single family building throughout the rest of the state has ramped up, helping to drive ongoing growth at the statewide level.

Bottom Line: Housing starts in Oregon continue to increase and our office expects a bit more growth in the coming years. These gains are more likely to occur outside the Portland region as the expansion continues to spread and reach all corners. A bit more growth in new construction, when coupled with a slowing population outlook, should result in a somewhat better balance in the housing market. Even if housing starts hold steady at current levels, due to supply constraints, lower demand or whatever reason, this too should bring a little more balance as migration flows taper in a mature expansion.

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Posted by: Josh Lehner | September 26, 2019

Urban Oregon Household Income, 2018 Update

This morning the Census Bureau released the 2018 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

As discussed earlier, at a statewide level incomes continue to rise and economic expansion is reaching all corners and populations. That said, we know disparities remain and not everywhere has shared equally in the growth, even as all regions have seen some growth. This post is a quick update on trends we are seeing across Oregon’s metro areas, or at least large enough areas for 1 year ACS estimates to be published. For rural income trends, we need to wait until December when the 5 year ACS estimates are released. Note that data can be noisy, particularly for smaller areas due to sample size concerns. Some of the year-to-year changes should be taken with a grain of salt, and the focus should be more on the big picture.

I’m going to start down in southern Oregon and work my way north along I-5 before heading over the mountains to check on Bend.

A few years ago we were beginning to worry about the lack of income growth in southern Oregon. Jobs were growing again and migration flows started to return, but there was hardly any wage or household income gains to speak of. Well, as expected, that has now fully turned around in the past couple of years. Incomes in Grants Pass, Medford, and Roseburg are at or near historic highs on an inflation-adjusted basis. With strong income gains last year, the poverty rate in both Jackson and Josephine dropped a full percentage point, while poverty held steady in Douglas as income growth stalled.

Traveling north to the Willamette Valley shows that income continues to grow throughout the state. Lane and Linn are experiencing healthy gains that are faster than inflation and nationwide figures. Corvallis continues to see tremendous income growth, which is something I’ll dig into further to see if we can pinpoint the underlying causes. And after a handful of really strong gains, household income in Salem has slowed and is effectively matching the rate of inflation in the past two years. When the underlying microdata is available, I will update our office’s look at migration to Salem and any potential housing crunch spillover impact coming from Portland, or elsewhere.

Further north, the Portland region continues to see income gains stronger than many other large metro areas. Growth has slowed just a hair the past couple of years and Portland did slip one ranking in terms of highest income among the 100 largest metros. Portland now ranks 17th highest as both Hartford and Ogden jumped ahead, but Portland also overtook Raleigh at the same time. Back in 2007, Portland ranked 32nd highest. In terms of overall growth from 2007 to 2018, Portland’s income gains rank 4th fastest in percentage terms. In the coming weeks I will have a full updated look at the Housing Trilemma which with help frame Portland and its growth in relation to the other large metros in the country.

Finally, let’s cross the mountains and check in on Bend where we know growth has been robust in recent years. We know job growth has been slowing, but household incomes did too with gains matching the rate of inflation last year. Now, the region still continues to outperform the other major housing bust areas from around the country, but this too is another area where I’ll dig into the underlying dynamics to see how the 2018 figures differ from recent years.

Bottom Line: All regions of Oregon are seeing gains. The state’s larger, urban areas are at or near historic highs for income on an inflation-adjusted basis and poverty continues to show improvements. The data can be noisy on a year-to-year basis, however our office will continue to dig into it further to hopefully shed light on recent changes, both good and bad. We will also explore the ACS further and examine housing-related issues, changes in educational attainment and the like. Stay tuned, new Census data is always fun!

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